Milk market scrutiny is intensifying with the NSW parliament poised to start an inquiry into the sustainability of the state’s dairy industry.

The snap move coincides with Queensland federal MP Llew O'Brien saying the outcry over farmgate milk payments and $1 a litre milk now warrants consideration of a Royal Commission into the way supermarket chains have controlled the milk market.

His Royal Commission thoughts were strongly applauded in Queensland where the dairy lobby predicted any federal inquiry would see horticulture and other supply chain players eagerly support milk producers with horror stories of predatory pricing and unfair contract strategies employed by big retailers.

The NSW Upper House committee investigation will include looking at the impact of retail power and fresh milk market deregulation 18 years ago.

We’ve heard some very distressing stories from farmers and had representations from dairy industry bodies pleading for some serious attention to the industry’s plight - Robert Brown, NSW Upper House committee chairman

Hearings in Sydney and rural areas will explore the price influences and nature of relationships in the value chain between farmers, processors, logistics companies and retailers, and the impact of drought, energy and water costs.

In Canberra federal Agriculture Minister, David Littleproud, has already flagged plans to see the milk market reformed, arguing the current market is clearly not working.

He is particularly focused on improving supermarket payment and pricing transparency so farmers get a better share of returns.

Details expanding on current federal government moves for a mandatory code of conduct between farmers and milk processors are likely to be released early next year and include oversight of retail price setting strategies.

Insights from the NSW Upper House Industry and Transport Portfolio committee’s inquiry, due to report in mid December, will be helpful in guiding Canberra’s plans.

Committee chairman, Robert Brown, said current extreme drought stresses on farmers had prompted the closer look at a broad range of factors influencing dairy sector sustainability.

Robert Brown

“NSW is predominantly a fresh milk market, but our findings could give the federal government something to work with when considering the wider milk market,” said Mr Brown, from the Shooters, Fishers and Farmers Party.

“We’ve heard some very distressing stories from farmers and had representations from dairy industry bodies pleading for some serious attention to the industry’s plight,” he said.

He believed the milk freight industry, which was largely reliant on owner-operators, was also “feeling a lot of competitive pricing pressure”.

There’s no doubt the nature of the dairy industry and its business models are under enormous stress - Niall Blair, NSW Primary Industries Minister

NSW Primary Industries Minister, Niall Blair, did not want to raise false hopes among farmers or see NSW duplicating any federal government reform efforts, but said “there’s no doubt the nature of the dairy industry and its business models are under enormous stress”.

While other farm commodity sectors had delivered strong earnings gains to farmers on the back of surging export and domestic prices, dairy was “definitely not doing as well”.

Frustratingly, dairy exports, including milk powder products, long life milk and fresh milk, were in big demand and fetching premium prices in Asia, particularly China.

Back in rural Australia, however, protests against “dollar milk” reflected intense discontent about market returns and spiraling farm costs.

Mr Blair said fresh milk markets in NSW and Queensland were not only based on delivering product all year round, farmers faced added pressure because of big drought costs, feed shortages and other rising farm input prices.

“Dairy farmers can’t just stop milking their cows,” he said.

“Instead, many farms have stretched production efforts to help lift their returns, relying heavily on stored fodder and feed supplements – and are now forced to compete for quality fodder in a costly stockfeed market.”

The ACCC found dairy farmers were wedged firmly at the bottom of the supply chain, unable to recoup lost value, - Sharugn Morgan, Dairy Connect

Advocacy group Dairy Connect’s chief executive officer, Shaughn Morgan, said the NSW and Queensland industries were caught in a vulnerable edge with little large-scale production of cheese and other dairy lines unlike the wider market options in southern states.

He urged the parliamentary inquiry to question whether the NSW government could bring back a milk marketing board or a dairy commissioner with strong powers of persuasion or industry oversight.

“The ACCC found dairy farmers were wedged firmly at the bottom of the supply chain, unable to recoup lost value,” Mr Morgan said.

“I’d expect the role of all commercial relationships within the dairy value chain be examined.

Real-time challenges such as energy and water costs and the need for enhanced dairy research and education, also needed reviewing.

We know Lion is selling out of the dairy industry in Australia and I expect Saputo may soon draw the line at close relationships with supermarkets and opt to build its export markets instead - Eric Danzi, Queensland Dairyfarmers Organisation

QDO has also backed the idea of a Royal Commission saying processors were privately admitting they could not afford to keep doing business with domestic retailers if the market was not changed.

“We know Lion is selling out of the dairy industry in Australia and I expect Saputo may soon draw the line at close relationships with supermarkets and opt to build its export markets instead,” Mr Danzi said.

“We applaud Llew O’Brien for leading this Royal Commission call.

“I think it has a realistic chance of happening, and getting support from a lot of other farmers and processors in other sectors.”

Mr O’Brien said retailers’ "tricky and cynical" actions and failure to follow through with a 10 cent "drought levy" on all milk brands were further proof of the need for a full blown inquiry into predatory purchasing practices and pricing policies by supermarket giants.

"Those who deal with these supermarkets are fearful of speaking out about unfair practices, and a Royal Commission would change this oppressive culture," he said.

National’s leader Michael McCormack said the issue was up for discussion in the party room.

Senator John Williams has supported a parliamentary inquiry at a national level, but not necessarily a Royal Commission.

He feared farmers and others being left vulnerable to retribution by buyers if they publicised specific concerns and contractual arrangements.

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